Download Shotwell Rutter Baer Newsletter 3q2016

QUARTERLY NEWS
Third Quarter 2016
What’s New at Shotwell Rutter Baer
Summer is in full swing, and you can’t beat this time of
year in Michigan. Other years summer has been a slow
time for us, as many of you are busy entertaining
company, heading to the cottage, the beach, or camping.
So far this year, that hasn’t been the case. We like it;
busy is good.
Jeff Rutter, our Administrative Assistant in the Lansing
office, is tackling the course work to become a Certified
Financial Planner Professional, and recently passed the
first class. One down, six to go. We’re excited to see
Jeff’s progress and we are looking forward to helping
him gain experience and continue helping our firm grow.
You may hear a new voice on the phone, and for some
of you it will be a familiar one: Amy Gauden, who
worked with David at NatCity Investments and at
Citizens National Bank, is now working with us as an
Administrative Assistant. She started in January and is
helping with operations, scheduling and updating
financial plans. She brings to our firm a vast amount of
experience in managing investment advisory offices, and
we couldn’t be happier to have her on board.
Lansing Office:
6350 West Michigan Avenue, Suite 200
Lansing, MI 48917
Fax: 517-321-9116
Ann Arbor Office:
116 East Washington Suite 200
Ann Arbor, MI 48104
Fax: 734-307-0944
Phone: 517-321-4832
www.srbadvisors.com
Third Quarter 2016
Page 2
Shredding Party! Wednesday August 17th, we will
have Accushred at our Lansing office to help us clear out
old files and accumulated documents safely and
securely. We’d like to invite you to take advantage of
this opportunity. Stop by with your old files and add
them to the pile for safe disposal. If you’ll be meeting
with David or Beth in the meantime, or stopping by the
office ahead of time, feel free to pass along anything
you’d like shredded.
Online Access: Our custodian, SEI, updated their client
online access site in April. If you haven’t visited the new
site, or if you haven’t had online access in the past but
would like to get started, contact Jeff in the Lansing
office and he can help you with the new login
procedures.
Website Enhancements: In January, we updated our
website, http://www.srbadvisors.com/. As part of the
update, we added a page with resources for existing
clients, http://www.srbadvisors.com/resources. On this
page you will find a tool to upload documents to our
server for us to review, links for online access to your
SEI accounts and your Money Guide Pro financial plan,
and a tool to schedule a time for a telephone
consultation.
Read our Blog: We’ve added a Blog to our website,
http://www.srbadvisors.com/blog. Here you’ll find
articles we’ve written on financial planning and
investment topics as well as weekly market updates and
news. If you’d like to receive an email when we post a
new article, you can subscribe to the blog by entering
your email address on the form on our blog page.
2nd Quarter Market Update
Brexit stole the spotlight during the second quarter of
2016. After a relatively uneventful April and May, the
surprise vote by the U.K. citizens to leave the European
Union created a lot of market volatility to close out June.
Despite the excitement, most of the market drop that
occurred in the immediate aftermath of the referendum
was short-lived, with the markets recovering almost as
sharply as they had dropped. As we wrote at the time,
while Brexit is certainly a cause for concern, the truth is
that the effects will play out over a number of years and
will depend on many variables as Britain and Europe
renegotiate trade treaties and contracts to put the
referendum into action.
Despite all the excitement closing out the quarter, April June 2016 was largely positive for investors. The US
stock market, as measured by the broad Russell 3000
index, was positive by
2.63%, reflecting a
generally positive outlook
for our economy. The
international market was
negative for the quarter by
1.05%, as measured by
the MSCI World ex-US
Index, reflecting the
broader global concerns
about growth and Brexit.
Meanwhile, US and
global bonds rose in price
as investors, worried
about the broader global
situation, sought out safer
assets. Domestic bond
Third Quarter 2016
Page 3
prices rose 2.21% (Barclays US Aggregate Bond Index)
and global bonds surged 3.11% (Global Bond ex-US
Market), pushing treasury bond yields to record lows.
your 5% bond is now more attractive, so other investors
are willing to pay you more than the face value of your
bond to buy it.
Where do we go from here? No doubt the focus over the
next few months will be on the presidential election.
Regardless of the election’s outcome, we’ll see plenty of
excitement – and most likely market volatility – in the
meantime. Through all of this, keep in mind that the US
economy is resilient, even if it isn’t always as strong as
we’d like, and, just as with Brexit, policy changes take
years to play out in the economy. Rest assured that a
large part of our country’s strength relies on a federalist
system of government intentionally designed to mitigate
the effects of any one leader’s role in our politics and our
economy.
That’s where yield comes in. Yield is a mathematical
function that takes into account how much you pay for a
bond along with the interest you will receive to tell you
what your return will be. If you buy your $10,000 bond
that pays 5% interest for $10,000, then your yield to the
bond’s maturity would also be 5%. But, if interest rates
fall so that new similar bonds pay 4% interest, the price
for your bond might rise to $10,800, which makes the
yield for the new buyer 4% if they hold it ten years to
maturity, the same yield as new bonds.
How Bonds Work: Price and Yield
Over the last few weeks, the bond market has been in the
news a lot as the yield on Treasury Notes has reached
record low levels. As I talk to clients, I have found that a
lot of people don’t understand the relationship between
bond prices and yields, and how the bond market
behaves.
A bond is a loan to a company or a government. When
you buy bonds, you usually purchase them in $1000
increments ($5000 increments for municipal bonds). The
bond will have a stated maturity date – the date when the
issuer pays back your face value – and a stated interest
rate. For most bonds, the holder will receive a fixed
interest payment every year which amounts to the stated
interest rate times the face value of the bonds they own.
So if you own a $10,000 bond with a 5% interest rate
that matures on 9/1/2026, you will receive $500 each
year and a lump-sum payment of $10,000 on that date.
While the bond’s face value and the interest rate are
fixed, the bond’s price changes with the market. If
interest rates are falling, the price of your bond will most
likely rise. Why? Because the fixed 5% of the bond
described above will now likely be higher than the rate
paid by new bonds of a similar quality and maturity date.
If new bonds maturing around 9/1/2026 are paying 4%,
Why does the yield go down when the price goes up?
Because the new buyer will receive the same 5% interest
payments, and the same lump sum $10,000 when the
bond matures, but they lose the $800 extra they pay to
buy the bond. When you spread that loss over the life of
the bond using interest compounding, the yield works
out to 4%.
The opposite is true if interest rates rise: If similar new
bonds are paying 6%, other investors will offer less for
your bond, somewhere around $9,250. When the bond
matures, they will have received $500 each year, and
will also get $750 more than they invested when the face
value is paid back. Again spreading that gain over 10
years and using interest compounding, the yield works
out to about 6%.
So, when you read in the news that bonds yields have
fallen to new lows, that means the prices for those bonds
have risen as more investors buy them.
David wrote this article and posted it on our blog on
July 13. For more articles like this, subscribe to our blog
at www.srbadvisors.com/blog.